Let’s Hope Oregon Doesn’t Replicate Washington’s IFCA Mistake

I recently assisted a coalition of business interests and insurers to address bills in the Oregon legislature which would adopt insurance bad faith causes of action in that state. Oregon law has not recognized extracontractual claims, as many other states laws’ do. Although Washington has long applied statutory consumer protection remedies to insurance and recognized common law insurance bad faith, Washington adopted the Insurance Fair Conduct Act (“IFCA”) in 2007, expanding remedies of insureds against insurers. These Oregon interests sought my perspective on the changes wrought by the IFCA, as it is the most recent and nearby parallel to the Oregon legislation. In preparing for my testimony before a committee of the Oregon senate, I called upon my own personal experience, and did some research, too. I concluded that Washington’s IFCA increased litigation, but apparently accomplished nothing else.

The most significant change after IFCA’s adoption was the remarkable increase in extracontractual litigation against insurers. Every good insurer’s lawyer I know has seen his or her business increase significantly since enactment of the IFCA. Because the IFCA dangles the enticement of trebled damages with no cap, there is no downside to an insured’s lawyer sending the 20-day pre-suit notice, and sometimes following it up with a complaint for real or imagined harm. True, my conclusion on increased litigation is based on anecdotal evidence. But filings with the Washington Office of Insurance Commissioner confirm this.

IFCA pre-suit notices are public record. The OIC lists every one, and posts the lists on its website. http://www.insurance.wa.gov/laws-rules/insurance-fair-conduct-act/ifca-laws/ (look for links to notices of potential lawsuits). The OIC did not keep a running tally before 2011, but from 2011 through 2014, pre-suit notices have averaged over nine hundred per year. The lists also identify the persons sending the notices, and they are virtually all lawyers.

So, what about the consumers’ own complaints? The OIC keeps statistics of general consumer complaints. It compares insurers to one another by ranking them by business volume-weighted numbers of complaints. As part of my work on the Oregon legislation, I chose one sector of the insurance market (personal auto), and tracked the complaint ratios of the five companies with the largest shares of the personal auto insurance market in Washington. These ratios remained remarkably steady over the past decade. Significantly, the ratios had only minor changes after the IFCA’s enactment in 2007.

Now, one would think that if insurer misconduct was so bad that the IFCA was necessary, the statute’s enactment would have changed the OIC complaint ratio as well as prompting thousands of new lawsuits or additional causes of action. But, at least when comparing the auto insurance market, that does not appear to be the case. In short, if we set the chance of unlimited trebled damages aside, there is no indication that Washington’s insurance consumers are appreciably better off than if the IFCA had not been enacted. This deserves more research and statistical analysis, but it also raises a question that brings me back to the Oregon legislation – is it necessary?

On many occasions since 2007, our lawyers have studied the IFCA’s legislative history, and now this year, I watched the testimony before the Oregon senate committee. The remarkable similarity between the Washington record and the Oregon record to date is the lack of empirical evidence of insurer misconduct driving a need for legislation for expanded (Washington) or new (Oregon) extracontractual liability. True, consumer advocates in both states presented witnesses to testify about their insurance claim horror stories, and no doubt there is at least some truth to them. But limited anecdotal evidence from interested claimants does not justify legislation. Better to rely upon evidence gathered from dispassionate, independent experts in the subject field to suggest whether new laws are necessary. One would expect that such an expert would be the insurance commissioner. But neither state’s commissioner proposed the IFCA or Oregon’s bad faith bill.

Legislation is a tool to remedy existing “mischief,” as courts have long recognized. Davies v. Metropolitan Life Ins. Co., 191 Wash. 459, 465, 71 P.2d 552, 555 (1937); State v. Tessema, 139 Wn.App. 483, 491, 162 P.3d 420, 424 (2007). In the case of Washington’s IFCA, there was little mischief to avoid, as demonstrated by the lack of empirical evidence to support it and as suggested by the lack of effect upon the OIC’s complaint ratios for personal auto insurance after it was adopted. What the IFCA has shown, however, is that the chance of trebled damages increases litigation volume and complexity irrespective of whether there was enough misconduct to justify those punitive measures or not. In short, the IFCA was a solution in search of a problem. Let’s hope that Oregon does not follow Washington’s example.